Scandinavia’s biggest banks have failed to curb funding risks linked to financial innovation and will probably only avoid downgrades if national regulators force through stricter measures, according to Standard & Poor’s.

Steps taken to date by lenders including Denmark’s Danske Bank A/S (DANSKE) and Nykredit A/S, as well as Nordea Bank AB (NDA) and Svenska Handelsbanken AB (SHBA) in Sweden, aren’t enough, said Per Tornqvist, a Stockholm-based analyst at S&P. As competitive pressure “forces banks to maintain short-term funding,” regulators need to step in and help banks extend their funding maturities, he said.

AAA-rated Scandinavia’s biggest banks are more vulnerable to funding shocks than their peers in the U.S., France and Italy, according to a July analysis by S&P, which measured liquidity risks five years after the collapse of Lehman Brothers Holdings Inc. paralyzed the global financial system. The rating company criticized Nordic lenders’ practice of using funds as short as one year to finance loans as long as 30 years, as well as a reliance on short-term offshore borrowing.

In Denmark, home to the world’s largest mortgage bond market per capita, banks refinance as much as $228 billion annually, spread over quarterly auctions. About 50 percent of Danish borrowers refinance their mortgages annually, according to the FSA in Copenhagen.

Efforts to sidestep funding mismatches by inventing new securities will do little to persuade S&P the lenders are really addressing liquidity risks, Tornqvist said.

Banks are responding to the latest regulator demands that they protect themselves against funding misalignments by inventing new securities.
Special Section: G-20 Meeting

Merkel Says G-20 Agrees on Regulation Plan for Shadow Banks

Group of 20 summit leaders in St. Petersburg Sept. 6 agreed on a road map for regulating shadow banks throughout the G-20, German chancellor Angela Merkel told reporters after the meeting.

Leaders from outside Europe “recognize that the euro areas crisis isn’t over yet but that confidence is returning, and when structural reforms continue and if we keep to our commitments and show we’re reliable -- that then we can overcome this crisis step by step,” Merkel said.

Merkel also said the G-20 leaders agreed to extend a commitment to refrain from new protectionist measures for another two years.

“The risk models that banks use to calculate their capital needs show worryingly large differences,” Carney, governor of the Bank of England, said in a letter Sept. 5 to leaders from the Group of 20 nations meeting in St. Petersburg, Russia. “This must be addressed for depositors, investors, clients and authorities to have full confidence in the strength of bank balance sheets and their resilience during a downturn.”

The Basel Committee on Banking Supervision, an international regulators group, said in July that some lenders were backing investments with as much as 20 percent more capital than other banks. European banks generally apply lower risk weights to their holdings of bank-issued debt than lenders based elsewhere, the Basel group said.

International standards set by the Basel committee require banks to meet minimum capital requirements, measured as a percentage of their assets.